Oil prices are an 'underappreciated' indicator of a coming recession - and they're flashing signs the US will avoid a downturn

Rogelio V. Solis/AP

• Falling oil prices are a sign the US could sidestep a recession in the near term, DataTrek said.
• That's because cheaper crude means cheaper gas prices, a major bill for most Americans. 
• "The risk of a recession over the near term seems quite low," DataTrek cofounder Nicholas Colas said.

Oil prices are an indicator of an incoming recession – and they're flashing signs that the US will avoid a downturn, according to DataTrek.

"Lower energy prices are an underappreciated counterweight to the manifold arguments for an upcoming US/global recession. Aside from the Pandemic Crisis, every US recession since 1973 has been presaged by a doubling of oil prices over a year's time," DataTrek cofounder Nicholas Colas said in a note on Tuesday. "On top of that, periods of economic expansion coincide with stable or (at worst) predictably rising crude prices."

Such was the case in 2000, when oil prices soared 141% for the year, and in 2007, when they jumped 96%.

Increases of that magnitude mean the US economy likely would have been pushed into recessions even if the dot-com and housing bubbles had never burst, Colas said.

That's largely due to the impact oil prices have on households, with the average American spending $150 to $200 a month on gas, DataTrek said, citing data from JD Power. An increase in gas prices means less money available for other bills, crimping Americans' spending power and hampering economic activity.

But crude prices have slipped in recent months, with West Texas Intermediate Crude down 35% since hitting $124 a barrel last year, when Russia invaded Ukraine and sparked chaos in energy markets. 

It's a promising sign the US may be able to avoid a recession in the near term, as falling oil prices have typically been associated with periods of economic expansions, such as the 1990s and the late 2010s, Colas said.

Though some analysts have predicted crude prices will spike back up to $100 a barrel by the end of the year, prices have hovered around $70-80 a barrel for three months, and are expected to stay suppressed through the summer, Colas said. And even if prices hit $90 a barrel, they would still be down on a yearly basis until October.

"The risk of a recession over the near term seems quite low," Colas said, adding to a growing chorus of market commentators who are more optimistic on the economy.

After previously predicting a recession, JPMorgan CEO Jamie Dimon recently said it was possible for the US to sidestep a downturn, given robust economic indicators.